Handle car washes like health care, and their cost will also go sky high

By DAVID MOON, Moon Capital Management
May 6, 2001

Although I should be used to it by now, I was shocked when I saw this year's rate increase on our corporate medical insurance. Everyone at Moon Capital Management is healthy (at least as far as I can tell) and we seldom actually use the coverage. Why should our premiums increase almost 30 percent?

Then I realized we do not have medical insurance; we have a pre-paid medical services plan. Insurance is the pooling of certain catastrophic risks where the risk of loss is relatively minor, but the cost of any single loss would be devastating. Insurance is not the pre-purchase of services you know will consume. Consider life insurance. The odds of you dying next year are relatively low, but the financial consequences are pretty steep: you will never earn another dime. That is an insurable risk. The odds of going to the doctor next year, however, are almost guaranteed.

Whether you live in a 30 year-old trailer with multi-colored Astroturf carpet or a huge house on a hill, you do not insure your home against normal, expected wear-and-tear. You insure your home against catastrophic losses like fire or tornadoes. What we call 'medical insurance' today is the equivalent of insuring your home against the wrong color paint. We have ten dollar co-payments for doctor office visits. We get two dental checkups per year, breath mints included. Routine physicals are covered. All of these services are important -- but appear to be "free" to the patient. And because the people who make the decision to purchase these services typically have no immediate and obvious financial interest in the cost of the services, it is easy to overutilize the medical system.

Imagine if your employer provided a pre-paid car wash plan. Local car washes would be full everyday. Cars worth only a few hundred dollars would stay sparkling clean, after receiving hundreds of dollars in "free" car washes each year. Eventually, the increased volume at the car wash businesses would require more employees and bigger facilities. Costs would increase. So would the cost of car wash insurance. Someone has to pay for those free car washes.

Proper medical care is important, but every ailment does not justify a trip to the doctor for a battery of tests. Our society expects the medical insurance equivalent of crab cakes, when fish sticks are often much more efficient and just as effective.

As a result of our short-term focus, we have given insurance companies (and in the case of elderly and indigent, the government) the right to ration healthcare services. In a normal market, consumers self-ration. That discipline disappears when the consumer has no marginal cost associated with a specific healthcare transaction. Doctors and hospitals are not honeysuckles growing wild along the highway, seemingly unlimited in supply. As long as healthcare resources are fixed, someone will always ration healthcare. Sadly, the patient and the physician are minor participants in that process today. If people really understood the indirect costs involved, we might occasionally opt for the fish sticks -- or, at least, not order so many crab cakes.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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